The Russian government encourages grain companies to develop deep processing to begin exporting products with higher added value and generate more profit from overseas sales. So far, those efforts have been in vain, but things may change in the future.
By 2025, Russia is likely to reach sustainable production of 145 million tonnes of grain per year, said Alexander Korbut, vice president of the Russian Grain Union. The domestic demand is projected to grow at a slow pace, so more Russian grain will land in foreign markets. In this context, the deep processing industry is needed to create a new anchor buyer of grain in Russia and mitigate price fluctuations on the global market, Korbut said.
However, there are more important reasons for Russia to develop a deep processing niche than to slightly increase domestic demand.
“Deep processing technologies are important to develop bio-economic products, the (global) size of which is estimated at $8 trillion,” said Alexander Chulok, director of the Scientific and Research Forecast Center of the Russian Higher School of Economy, adding that Russia definitely wants a piece of this pie.
“It will be decided in the coming years whether Russia will be able to emerge in this market,” Chulok said.
In the early 2000s, when global oil prices skyrocketed, Russia has made a critical mistake by not establishing a sophisticated processing system, Chulok said. This fact is reflected in numerous statements Western politicians made during the last decade, like when US Senator John McCain compared Russia to “a gas station,” noting that revenue from crude oil exports accounted for the lion’s share of the Russian GDP.
“Grain is considered to be the new oil,” Chulok said, stressing that it is paramount that the country does not make the same mistake and neglect the processing industry again.
By developing the grain processing industry, Russia could manufacture a broad range of products, including glucose-fructose syrups, sweeteners, amino acids, feed vitamins, and so on. The country currently pays around $5 billion per year to import those goods and import replacement in this field would spur the Russian economy’s development pace.
Nadezhda Orlova, head of the Department for Innovative Technologies in Agriculture of the Higher School of Economics, said vast opportunities for Russian deep processing could also lie in the field of bioplastic production.
“Biodegradable and non-biodegradable plastics are produced and used in a wide variety of industries, including for the production of flexible packaging, all types of plastic containers, various types of coatings and even car parts,” Orlova said.
He said this segment has been rapidly growing on a global scale, and it is where Russian companies could find opportunities.
No money, no market, no technologies
However, market participants admit there are numerous problems constraining Russia’s deep processing segment development.
Alexey Balanovsky, director of the Russian Premix Plant N1, explained that Russian banks were reluctant to issue long-term loans for agricultural projects. Besides, the Russian government rarely approves subsidies for projects with a long investment cycle.
“Deep processing projects would not repay themselves in eight years, as it takes four years to complete construction projects,” Balanovsky said, adding that without them the deep processing segment has little chance of success. “The loans must be issued for 12 to 15 years.”
The payback is not guaranteed if no export supplies are envisaged. The Russian market is too small to justify launching big projects, and without foreign sales, any production facilities would be doomed to low-capacity utilization ratios and low margins.
“We have to admit that with the emergence of new enterprises on the domestic market, it will really become crowded,” Balanovsky said.
Private investors are afraid of pumping money into deep processing since selling a product is often more challenging than manufacturing it.
“In international markets, we will be uncompetitive,” Balanovsky said. “We will not be able to compete with China in terms of price. In Europe, we are not expected to compete, and Turkey and Iran are too modest of markets.”
A source in the Russian grain industry who wished not to be named added, “The truth is that Russian products are not awaited anywhere in the world with open arms. All production chains on the global market are being formed, and to compete with the world giants, our companies would need to offer the best quality and attractable price. Neither is guaranteed. Besides, one must take geopolitical factors into account. Various sanctions, economic restrictions, and export-restraining policy embarked on by the Russian government would not add appetite for foreign companies to build new ties with the Russian partners.”
In addition to a coordinated government policy and developed financial tools, the Russian grain industry requires new types of grain with special features to qualify for deep processing projects, Korbut said. This must be done in cooperation with the leading scientific institutes, he added.
Market participants said deep processing requires cutting-edge technologies that have yet to be developed in Russia. There is little chance this problem could be overcome without substantial government support.
First uncertain steps
Several projects for deep processing of grain have been announced in Russia during the past decades, but most of them were eventually canceled or raised questions among market players.
One of the biggest projects in this field belongs to Arnica. The company planned to invest 21.1 billion rubles ($270 million) to build a production cluster in Vladivostok, manufacturing lysine monochloride, valine, tryptophan, as well as A, B, P, and D vitamins.
In total, Arnica plans to build 10 factories for the deep processing of grain to manufacture in total 25 product items for the Russian feed industry, some of which have never been produced in the country. The new cluster is slated to become operational in 2024.
Around 30% of the production volumes are expected to be exported to the Asia-Pacific region: South Korea, China, Japan, Thailand and Vietnam.
Sergey Miknyuk, chairman of the Russian National Feed Union, said it’s too early to tell whether Arniva can establish a full-cycle production and not “semi knock-down.” Market participants also complain that Arniva is not fully transparent about the used technologies and the features of its production.
Another company, Saratov Biotechnology, also has signed an agreement with the regional government of Saratov Oblast to build a plant for the deep processing of grain. The company plans to process 250,000 tonnes of grain per year to produce high-quality feed additives, gluten and bioethanol. The cost of the project is €254 million ($300 million), and the plant is expected to become operational in 2021.
However, the Russian feed industry is heavily dependent on feed ingredient imports, with the exception of lysine. Thus, it’s hard to imagine that additional significant projects in this area could be achieved in the coming years.
“All livestock and poultry products produced in Russia are based on imported feed additives,” Mikhnyuk said. “And if those feed additives run out, this whole structure could collapse or become less efficient and productive.”
As for vitamins, all statements about the start of their production in Russia are “slyness,” Mikhnyuk said.
“At best, we are talking about localizing the technological redistribution of the last link, or about the repackaging of vitamins, as a rule, imported from China,” he said.
Similarly, Russian bioethanol production is in the embryonic stage. Being the world’s second-largest oil producer, Russia sees no sense in producing bioethanol in Russia, said Alexey Ablaev, chairman of the National Biofuel Association.
“In our country, we have so much good high-quality fuel that it could be safely said that there is really no need in bioethanol,” Ablaev said, noting that from the agricultural industry’s point of view, bioethanol production could solve the problem of waste and excessive grain production.
“We have plenty of grain and an overproduction of oilseeds,” Ablaev said. “The easiest way of dealing with them is through increasing the domestic demand.”
In general, the Russian deep processing of grain segment may have bright prospects, even without large-scale bioethanol production, Ablaev said.
“Despite the obvious difficulties, and the density of competition with China and European manufacturers, the (bioethanol) industry in Russia has a chance to become a leading and important one in terms of its contribution to the country’s economic security,” Ablaev said.
Competitor next door
Deep processing in Russia also will have to compete with Belarus National Biotechnological Corp. (BNBC), whose commercial operations are at full speed. The new giant production cluster is designed for manufacturing a broad range of feed additives.
The first production under the B Block, which is comprised of feed additives production, is expected to begin in the autumn of 2021, the company said.
In 2022, BNBC plans to produce 100,000 tonnes of feed amino acids: lysine, tryptophan, and threonine.
BNBC will generate a profit of $700 million in the current prices, the company’s management estimated. Only 20,000 tonnes of the amino acids are targeted for the domestic market; the rest will be exported, including to Russia.